The charitable deduction in Singapore

by on September 2, 2013 at 1:33 am in Economics, Law | Permalink

There is no reason why deductions cannot be super-charged:

To encourage greater charitable giving in Singapore as the economy recovered, the Minister for Finance announced in Budget 2011 that  tax deduction of 2.5 times will be extended for another 5 years to donations made from 1 January 2011 to 31 December 2015.

The full document is here.  If that does not sink through, here is another discussion:

What this means is that for every dollar that you donate to charities, the government will deduct $2.50 off your tax payable. If you have been paying Income Tax, you will know that this is something extremely beneficial.

A few years ago the deduction was only 2x and that in turn was a relatively new policy.  Do any of you know of research on the impact of these policies and changes?

Here is Bruce Bartlett, who is skeptical about the charitable deduction in the United States.

Brandon Berg September 2, 2013 at 3:06 am

The second source is wrong. This is a tax deduction, whereas he’s describing a tax credit.

At Singapore’s low marginal rates, I suspect that the marginal after-tax cost of donations at 2.5x deductibility is not so different from what it is for a top-decile earner in the US.

david September 2, 2013 at 7:41 am

Yes, the second source is wrong. What it means is that for every dollar that you donate to charities, the government will deduct $2.50 from your taxable income, not your tax payable. Given that the top rate is only 20%, the $2.50 could only have been taxed of $0.50 anyway. So it is not possible for you to save money by donating instead of paying taxes.

Bill September 2, 2013 at 8:56 am

This is actually interesting.

You could measure the price elasticity of charitable giving based on the change in effective rates.

Chris Hesse, CPA September 2, 2013 at 12:24 pm

Brandon is exactly correct. The linked document describes it as a tax deduction, not a tax credit.

J1 September 3, 2013 at 12:17 pm

The article contains a correction:

“Edited on 3rd September 2013: Changed a typo, it should be “Taxable income and not Tax Payable”

dan1111 September 2, 2013 at 3:07 am

“for every dollar that you donate to charities, the government will deduct $2.50 off your tax payable”

Surely that cannot be correct. That would make it a tax credit rather than a tax deduction. And a tax credit of donations with a multiplier greater than 1 would lead to everyone making donations to cover their entire tax bill.

dan1111 September 2, 2013 at 3:19 am

I agree with the skepticism about tax deductions for charities. Operating on a non-profit basis doesn’t automatically make an organization virtuous and worthy of government subsidy.

Of course, many charities are virtuous. They often provide services much more efficiently than government does. But subsidizing every organization that uses a particular operating structure, just to support those that are doing good work, is a massive inefficiency that offsets that benefit.

I worry about the effect that removing the tax deductions and exemptions would have on charities I like, but probably a world in which these deductions did not exist would be better.

Brian September 2, 2013 at 7:34 am

And what counts as an approved charity? I’m guessing that the Church Of A Free And Democratic Singapore isn’t eligible.

AADL September 2, 2013 at 7:51 am

Abolish the income tax. “Problem” solved.

Boonton September 2, 2013 at 10:53 am

What’s the problem that’s trying to be solved?

It sounds like there’s a fuzzy idea that more charitable giving would be good. Well abolishing the income tax doesn’t magically make that happen since the income tax would be replaced by some other type of tax which may or may not leave people inclined to give with more disposable income to give.

The idea behind the deduction is to sweeten the incentive for giving. Without the deduction you got whatever emotional pleasure you get from giving $2.50. With it you get the emotional pleasure plus $0.50 in reduced taxes. But the real problems are:

1. To what degree does that cause someone to give more versus just give rewards to people who are going to give anyway? Suppose I give the same $2.50. All the gov’t has done is kept my giving the same but hurt its budget by $0.50. If the gov’t had simply done a 10% matching program it could have spend half as much ($0.25 rather than $0.50) and ensured 100% of the cost of the program went to charity. The budgets of charities would have seen a 10% boost instantly.

2. Why is it assumed that giving to charity is such a good thing? Would the world really be better if people reduced eating out by 50% and gave all the savings to soup kitchens? It seems to me such a mass movement for charity would be a diaster. Hundreds of thousands of low wage, low skill jobs would disappear. Instead of people making a living for themselves, you’d end up pushing them into soup kitchens.

I’m not opposed to encouraging charitable giving and punishing excessive consumption on the grounds that it makes for a nicer society, more easy to live in than one purely dominated by a ‘Real Housewives of…’ mentality. But I don’t see evidence that it’s an economic solution for anything, not even a real substitute for gov’t entitlement programs. Before asking whether such and such policy can really boost charitable giving dramatically, I’d like someone to seriously ask whether a serious boost to charity would really be a good thing. I’m not so sure it would be.

Carl Shulman September 2, 2013 at 6:25 pm

“Why is it assumed that giving to charity is such a good thing? Would the world really be better if people reduced eating out by 50% and gave all the savings to soup kitchens? It seems to me such a mass movement for charity would be a disaster. Hundreds of thousands of low wage, low skill jobs would disappear. Instead of people making a living for themselves, you’d end up pushing them into soup kitchens.”

If the same money is spent, it will mobilize matching resources. If you pay $N for a fancy restaurant meal then your money pays for the people who grow the food, transport it, prepare it, serve it, construct and maintain the restaurant building, etc. If you donate $N to soup kitchens that pays for farmers to grow the food, packaging and logistics, the construction and maintenance of soup ktichens, etc. The real shift of activity is from people working as waiters at fancy restaurants to people working in soup kitchens, farms, construction, etc. And since hungry people get a lot more utility per dollar out of adequate nutrition than most people get out of fancy restaurant meals, that real reallocation of resources is a good thing.

Boonton September 3, 2013 at 1:29 pm

I think you’d still have a welfare loss. One the one hand you’re giving up things people actually want and in exchange producing things charity directors *think* people need (i.e. soup kitchens). You end up with the same problem that you get with socialism, except you’ve gotten it not so much by gov’t action but by conning people into thinking the stuff they would normally demand is inferior or immoral and getting them to voluntarily give their purchasing power to a central planner.

Tracy W September 2, 2013 at 11:04 am

I find this unbelievable – wouldn’t everyone in Singapore donate to the point that they were paying no tax? The first link said nothing about an annual limit to the deduction that can be claimed. Is Singaporean tax policy being set by a bunch of dedicated anarchists?

BC September 2, 2013 at 11:44 am

Re: Bartlett piece on charitable deductions, part 1 [http://economix.blogs.nytimes.com/2013/08/20/the-future-of-the-charitable-deduction/], linked to in part 2, which Tyler references. A pet peeve of mine is when pundits describe the charitable deduction as a tax “break” or tax expenditure and group it with all the other tax breaks. The (1x) deduction for charitable contributions is not a “break”. Rather, it is required to avoid imposing tax penalties on charity. If one does charitable volunteer work for free, say doing $100 worth of unpaid labor at a soup kitchen, one would not incur $100 of taxable income. Similarly, if one, say, writes a book and directs the royalties to charity, one would not incur any tax liability on the royalties that one never received. Now, suppose one decides to work for charity at one’s regular occupation by receiving $100 of pay from one’s employer in one’s checking account and writing a check for $100 to the charity. Since money is completely fungible, this scenario is equivalent to doing $100 of unpaid volunteer work. Without the charitable tax deduction, however, one would incur $100 of taxable income. The lack of a deduction would be equivalent to penalizing charitable contributions by taxing them. So, from now on, whenever someone decides to argue that we need to get rid of all tax “breaks”, even the popular ones, to simplify our tax code, please don’t use the charitable deduction as an example. It’s not a break. It’s a correction to income accounting that would otherwise count income that was never received.

The other peeve I have is when pundits assert that people in higher tax brackets or who itemize deductions “benefit more” from tax deductions than those in lower brackets or those whose standard deduction exceeds their itemized deductions. For *any* income level and amount of itemized deductions, which tax policy would be most favorable to the tax payer:

(A) a tax rate of 39% and a standard deduction that is less than one’s itemized deduction; or
(B) a tax rate of 28% and a standard deduction that exceeds the itemized deductions?

Of course, (B) is always better from the tax payer’s perspective. Raising someone’s tax rate from 28% to 39% so that they could “save more” on their deductions would not lower their tax bill and neither would reducing their standard deduction to a level below their itemized deductions. That’s like thinking that one saves money at a 50%-off sale when the store doubled all the regular non-sale prices. When one’s standard deduction exceeds one’s itemized deductions, one not only gets to deduct one’s actual deductions, one in addition gets to deduct deductions that one never made. Similarly, one can view the 28% tax rate as a 39% tax rate paired with a 11% reduction when one doesn’t have offsetting actual deductions and a full deduction when one does have actual deductions. It is true that under (A) one is more *incentivized* to make charitable contributions, but that is different from receiving more *benefit*. If I take $100 from you and offer to return some portion of it if you if you do action X, then you will be more incentivized to do X than if I don’t take the $100 from you to begin with. However, you are better off if I don’t take the $100 from you to begin with. So, while there may be many aspects of the tax code that benefit the wealthy, higher tax rates and standard deductions that don’t exceed itemized deductions are not among them.

I will get off my soap box now.

Boonton September 3, 2013 at 1:57 pm

BC,

I don’t agree with your thinking:

1. If labor is unpaid, then it’s automatically not taxed whether or not it’s for a charity. If I give $100 worth of unpaid labor to a charity, I’m charged no income tax. If I give $100 worth of unpaid labor helping my friend move, I’m also not taxed.

2. “Similarly, if one, say, writes a book and directs the royalties to charity, one would not incur any tax liability on the royalties that one never received.”

The problem here is that the author acquires income (purchasing power) and then directs where that income goes. An author may give the rights of a book to a charity, but then he looses control over the income. Otherwise you still have income whether the author is directing all of it to charity or all of it to a new girlfriend he just meet.

2.1 “Since money is completely fungible, this scenario is equivalent to doing $100 of unpaid volunteer work. ”

Not quite. The author has the option to take that $100 as actual cash and use it for anything he wants. When someone does “$100 worth of unpaid labor”, well there’s no way you can really say that labor is worth $100. This might make sense IF the charity actually paid someone $100 for their labor and that person turned around and signed the check back over to the chairty. But again that would have to be voluntary.

Itemized deductions:

You’re right, but simply making the standard deduction so big that it always pays more to take it is essentially the same thing as making charity not deductible. And, of course, the standard deduction is mildly regressive too since a bigger standard deduction is not worth anything if your income is so low that it’s less than the standard deduction.

Bryan Willman September 2, 2013 at 12:42 pm

There’s another issue afoot – to what extent in Singapore is tax deductibility of a cause equivalent to a stamp of approval from the authorities and society? That is certainly a real phenomnon in the US – “it’s a 501(c)3 it must be OK…”

There is some truth to that – 501(c)3′s that engage in outright fraud get various sorts of comeuppence from the authorities at least some of the time. But it’s not an actual figure of merit – it’s more an IRS stamp of partial approval which gets treated as a figure of merit.

I wonder to what degree that’s true in singapore?

Hal Varian September 2, 2013 at 12:45 pm

This is a form of matching grant, which I wrote about here: http://deepblue.lib.umich.edu/bitstream/handle/2027.42/31803/0000749.pdf?sequence=1

Turns out that the inventor of matching grants was none other than Benjamin Franklin: “This condition carried the bill through; for the members who had opposed the grant, and now conceived they might have the credit of being charitable without the expense, agreed to its passage; and then, in soliciting subscriptions among the people, we urged the conditional promise of the law as an additional motive to give, since every man’s donation would be doubled; thus the clause worked both ways.”

List and Karlin found that matching increases contributions, but higher matching rates are not as powerful as one might think. http://www.afpnet.org/ResourceCenter/ArticleDetail.cfm?ItemNumber=4687

Victor Wooten September 2, 2013 at 12:54 pm

A dream becomes a goal when action is taken toward its achievement.

lxm September 2, 2013 at 1:27 pm

When I itemized deductions I was careful to account for all my charitable deductions. Now that I no longer itemize, I still make charitable contributions, maybe more and certainly no less.

And I feel better about them now.

Rnova September 2, 2013 at 2:55 pm

You know, Charity is not about ‘what’s in it for me?’ It’s nice to know the facts about taxation and whatnot, but let’s not confuse a transactional action, a business deal, with Charity. Charity is rather a space reserved for people with a great sense of gratitude and commitment to share, alleviate suffering, transform lives, and make this a better, albeit not completely just, place. The same self-centered logic of accruing capital seems anathema to that idea, unless filled with a great sense of purpose of becoming generative person in the world, rather than simply a taker.

Thomas September 3, 2013 at 12:01 am

Your post mirrors tax policy a lot in the sense that if the money weren’t taken to begin with, charity wouldn’t be an exclusion from it’s taxation. Do you suppose that the world would be a better place if people who had less than pure motives for charity did not contribute? Or, is your argument simply a semantic one, in which case someone would be hard pressed to disagree with you?

BC September 3, 2013 at 4:00 am

Two observations.

(1) If the tax laws are written such that they effectively penalize charitable giving, however unwittingly, by imposing $28 or $39 of additional taxes for every $100 that one donates to charity, then that would seem to disincentivize charity, even among those that have the noblest of intentions.

(2) As citizens interested in policy, rather than as individuals determining our own level of charitable giving, one of the questions we face is what allocation of resources to private charities and government will lead to the greatest social good, alleviation of suffering, transformation of lives, and all the other good things that you mention. Who is more likely to make the greatest positive impact with those resources: politicians and lobbyists or those motivated to found and run private charities and non-profit organizations? Our tax laws around charity reflect our judgement in contemplating that question.

Boonton September 3, 2013 at 2:04 pm

BC,

I agree with point 1 but not with this:

“Who is more likely to make the greatest positive impact with those resources: politicians and lobbyists or those motivated to found and run private charities and non-profit organizations?”

You forget something. If you eliminate the tax incentive for charity, then indeed it may ‘cost’ $29 more to give $100 to a charity. But right now it costs $29 more to buy something else with $100 than to give it to charity, whose directors will use that $100 to buy something they think is good.

It’s perfectly fair to say if we get rid of the $29 ‘incentive’, soup kitchen A might get $100 less this week. But that analysis has to be balanced out by the fact that some other enterprise will get $100 more and that positive should be compared to the soup kitchen’s negative.

Your statement seems to assume that the only two entities that can spend money are the government or charities, but ultimately almost the entire economy is dominated by consumers spending money and it might be that charity is overrated. That $100 spent by consumers could turn into additional hiring by both low and high wage sectors which might be more valuable to people using a soup kitchen than simply more soup.

aram September 3, 2013 at 5:16 am

Argh! Marginal tax rates in Singapore about about half that in the US.
https://www.iras.gov.sg/irasHome/page04_ektid282.aspx

So… this deduction has about the same effect as the US policy.

Bill Reeves September 3, 2013 at 7:56 am

You economists (I’m one too) are missing the real story: Singapore is a highly centralized society where much of what we would call civil society is run by the state. Charitable giving is small relative to wealth. What Singapore is doing by subsidizing charity over deductions for taxes or other expenses is saying that it believes that informal cooperation between the people, aka ‘civil society’ is wanting. They are trying to encourage habits of charity and independent action that we in the US (World Champions for Charity for 2 Centuries) take for granted.

It’s a nice compliment.

Floccina September 4, 2013 at 3:25 pm

There is a lot of charity that goes on between family and friends that is not deductible. This is often the most effective charity.

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